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Tuesday, March 10, 2015

U.S.-Cuban rapprochement and the European Union – part 1

By CLéMENT DOLEAC

The European Union (EU), which has been working to normalize its ties with Cuba since 2010, defined the announcement of the reestablishment of the United States-Cuban relations as a “historical turning point.” The EU foreign affairs head, Frederica Mogherini said that “another wall has started to fall,” and that the European Union is willing to “expand relations with all parts of Cuban society.”

Representatives from Cuba and the EU will meet this month for a third round of negotiations aimed at normalizing relations after a decade tainted by the already recognized hypocritical European Union Common Position which pressed Cuba to discuss human rights and the role of civil society in the Cuban politics.

These new negotiations cannot help but bring on a high level of uncertainty because the turn in US-Cuban relations will impact EU-Cuba relations. Among other concerns, the economic standing of the European Union in Cuba as its second largest trading partner remains at risk.

EU common position and the progressive improvement of EU-Cuba relationship

In 1996, the then-15 EU member states adopted a common position (CP) related to Cuba. Under conservative Spanish leadership this position supported the latest US round of sanctions against Cuba, the Helms-Burton Act, which had the clear objective of tightening restrictions against the Castro regime. The US and EU intended to force the Cuban government to reform different sectors of its economy and society, and its political system, including the human rights situation.

Unsurprisingly, the CP was strongly criticized by Cuban authorities and led to a political stalemate between the EU and Cuba. Despite such a tense political situation, European companies were among the first to invest in Cuba when the government loosened economic restrictions in 1995, known as the “special period in times of peace” following the Soviet Union’s collapse which resulted in Cuba’s GDP falling 30 percent in four years.

However, European companies had to comply with the extremely strict and restrictive application of rules on foreign investments imposed by the Cuban government such as the obligation to submit to a 50/50 joint-venture with the state, the difficulties of repatriating dividends, and the impossibility of managing human resources directly.

Even with the CP, the EU had always been significantly less strict than the United States toward Cuba. The EU gradually improved ties with Cuba during the last two decades. In fact, 18 member states of the European Union have signed cooperation agreements with Cuba.

Also, as one observer put it, “[the EU has] never excluded Cuba from participating in their summits with Latin America and the Caribbean, such as the Iberoamerican conferences of heads of states and government since 1992, and the Latin America and Caribbean-European Union summit gatherings since 1994.”

However, in July 2003, several independent journalists, trade union activists and dissidents were arrested across Cuba, and accused of conspiracy for cooperating with the director of the US Interest Section in Cuba, James Cason. The accusations were based on diplomatic invitations of dissidents to attend official receptions, in order to symbolically further their struggle against political repression.

Seventy-five persons were sentenced to six to 30 years in jail. Consequently, the EU Council froze its diplomatic ties with Cuba, halting all cooperation and development aid that existed before. In addition to clamping down on the US-financed dissent, Fidel Castro apparently felt that the previous economic opening was too much, too fast. Thus, he reversed the decision regarding the still small Cuban private sector (“cuentaspropistas”), and placed additional restrictions on Cuban economic liberties and foreign investments.

Yet, it is fair to recognize that some foreign investors might have tried to escape the Kafkaesque Cuban system by illegal means, leading to corruption cases. As a result, the number of joint-venture companies was halved between 2001 and 2007 and the government used the occasion to seize some valuable assets.

In 2004 Cuba released a number of dissidents and the EU revised its strategy to maintain more discrete contacts with local dissidents. After nearly two years of tensions passed, the EU chose not to invite opponents of the regime to official celebrations. Consequently, Cuba normalized its ties with a number of European countries, including France, Spain, and Germany.

It was not until 2006, when Fidel Castro handed his leadership of Cuba to his younger brother, Raul Castro, that this diplomatic conflict ended. However, it would take two more years for the EU to restart cooperation with Cuba after the release of the majority of the dissidents.

In 2008, Cuba was hit by three successive hurricanes, which caused significant damage in parts of the country, crippling its economy, and leading to a partial default vis-à-vis its main trading partners. Since then, the European Commission has committed nearly €60 million for post-hurricane reconstruction, food security, climate change policies, renewable energy, culture, and education in Cuba. The EU also allowed Cuba to take part in EU-funded regional programs.

This pursuit of a more comprehensive approach toward Cuba was strengthened by the position of Spain, which has advocated since 2010 for a revised CP. At the time, Trinidad Jimenez, Spain’s Secretary of State, declared the CP to be a “discriminatory, inefficient and illegitimate” policy.

Still, for a policy change to occur, the unanimous support of the 27 EU member states was necessary. While several countries were supportive of the Common Position, mostly because of their past suffering of Soviet authoritarianism, other EU countries had a more flexible idea of what should be the nature of EU-Cuba relationship.

On May 12, 2010, the first Country Strategy Paper was adopted on Cuba, including an additional fund of €20 million during the period 2011-2013 in order to pursue the EU’s ongoing cooperation, as well as an additional aid of €4 million in order to help the Cuban population affected by the Hurricane Sandy in November 2012.

After the sixth Cuban Communist Party (CCP) Congress in 2011 revealed its lineamientos (“guidelines”) to “actualize [the] Cuban economic model,” as well as introduced the first reforms started to be implemented sin prisas pero sin pausas (“slowly but surely”) by Raul Castro, the EU-Cuba relationship continued to improve.

Finally, during the first months of 2014, all the EU member states agreed to give a negotiation mandate to the EU’s foreign policy chief to discuss and renew EU-Cuba partnership. The CP and its flexibility led to a significant improvement of the EU-Cuba relationship by encouraging Cuban government policies to move towards more liberal economic and political practices.

The EU as Cuba’s second largest economic partner

The EU is an important economic partner of Cuba, filling the void US trade sanctions produced. Trade between the EU and Cuba is now dynamic, representing a positive balance for the European Union. Among the top 10 trading partners of Cuba, four countries are member states of the EU: Spain is third, Holland seventh, Italy ninth and France tenth.

In 2013, the European Union imported €837 million worth of goods from Cuba and exported €1,834 million to Cuba, representing a nearly €1 billion surplus That year, transactions with the European Union and the rest of the continent accounted for 28.3 percent of Cuba’s foreign trade. This statistic shows that 36.7 percent of Cuban exports go to the EU market and 25.9 percent of national imports come from that region.

The trade relationship between the EU and Cuba is concentrated in two kinds of goods: agricultural and industrial products. Agriculture represents 42.5 percent of EU imports from Cuba while Cuban imports from the EU are 84.7 percent industrial products. On one hand, the EU imports foodstuffs, beverages, and tobacco, including rum, cigars and sugar derivatives (40.8 percent) and mineral products such as nickel and scrap metal (33.6 percent). On the other hand, the EU exports to Cuba machinery and appliances (34.5 percent), and products of the chemical, plastics and allied industries (13.4 percent).

It is easy to see that the trade relationship between Cuba and the EU is unbalanced: Cuba exports mostly primary products (85 percent of their trade total), while the EU exports manufactured ones (around 81 percent of their total exports).

EU-Cuba trade recently suffered a setback with the exemption of Cuba on January 1, 2014 from the Generalized System of Preferences (GSP). The Cuban exclusion is due to the way Cuba changed its method to calculate its nominal GDP in the early 2000s in order to give it a statistical boost of 15 percent. Automatically, the country jumped to higher level in EU’s GSP ranking, making it a middle income nation.

Aware that this new methodology could present such a risk, Cuban authorities preferred to keep their obscure statistics and reduce its market in Europe, in order to appear among the “developed economies”. Thus, under the new rules, taxes on Cuban cigars jumped from 7.8 percent to 26.9 percent in 2014. Despite being considered a part of the African, Caribbean and Pacific Group of States (ACP) since 2010, Cuba does not benefit from the ACP-EU Sugar Protocol, and therefore loses an advantageous tariff for its sugar.

Other EU economic presence in Cuba

The EU presence in Cuba is not only a trade relationship. European companies are present in many areas of Cuba’s economy. For the last 20 years, the EU has been the second largest source of tourists to Cuba. Tourism brings the cash-starved Cuban economy $1 to 2 billion USD every year, and is its 3rd source of cash after medical services and remittances.

Therefore, it is no coincidence that the Cuban tourism industry is dominated by European operators from Spain, France, and Germany. But, since Obama’s easing measures in 2008, Cuban-Americans and authorized (or not) American visitors have also significantly increased.

Also, one would be surprised to see how many French Peugeots and Renaults are driven along with 1950s American Chevys and 1970s Soviet Ladas in Havana’s streets. Spanish Seats and Italian Fiats are not unknown either.

European exporters of food, machinery, industry, and chemicals also represent an alternative to cheap but unreliable Asian materials, antique Russian products and, of course, banned American goods.

To finance this trade, European banks are also vital to the Cuban economy. Indeed, it is clear that European companies benefit partly from the absence of American competitors in Cuba that were forced out by US sanctions.

• Clément Doleac is a research fellow at the Council on Hemispheric Affairs. This column was published with permission from Caribbean News Now. The second part will appear in Saturday’s Nassau Guardian.